sebi jurisdiction

7/30/2019 SEBI jurisdiction

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KHAITAN & CO ARTICLE

SEBIs Jurisdiction | Analysis of the Supreme Court judgment in the Sahara case

Ashwin Mathew, Consultant

Khaitan & Co, Mumbai1

1. Introduction1.1 Any business venture needs funds to grow. As a business vehicle, a company has two main

avenues for raising funds share capital and debt. An important factor that determines the

attractiveness of any investment in a company is the return on investment. By its very nature,

debt carries interest which represents the return on the creditors investment. Dividends

represent the return on share investments but unlike interest, dividends are not guaranteed and

depend on the profitability of a company. Consequently, share capital is referred to as risk

capital. Besides payments from the company in the form of interest or dividend, as the case

may be, a market in securities, whether for share capital or debt, increases their attractivenessas investment instruments. This is because investors can trade in securities and realize returns

on their investments without depending on the company. A vibrant securities market is,

therefore, an important financial institution and its depth is often a measure of economic

development and stability. As a result, dealings on the securities market must be fair and

incapable of manipulation to ensure that the market is driven by the economic forces of

demand and supply.

1.2 History has shown that manipulation of the securities market is a recipe for economic disaster.Investor protection through various measures like stringent disclosure standards, safeguards

against insider trading, takeover regulations, technological innovation and integrity, to name a

few, hold the key to a level playing field and fair and transparent dealings in the securities

market of a country. In the aftermath of the 1992 stock scam in India, the Securities and

Exchange Board of India (SEBI) was constituted under the Securities and Exchange Board of

India Act, 1992 (SEBI Act) to protect the interests of investors in securities and to develop and

regulate the securities market2.

Indian Securities Laws

1.3 In India, the Companies Act, 1956 (Companies Act), the Securities Contracts (Regulation) Act,1956 (SCRA), the SEBI Act and the Depositories Act, 1996 (Depositories Act) are relevant to

the regulation of companies, contracts in securities and the market for securities. Each of these

laws is supplemented by rules and regulations that regulate various aspects of securities law. In

addition, listing agreements between the company and the relevant stock exchange govern theterms on which securities of the company are listed on the exchange.

1Views are personal and may not necessarily reflect the position of the firm.

2Prior to SEBI, the issue of capital by companies was regulated by the Central Government under the Capital Issues

(Control) Act, 1947. The regulatory authority was the Controller of Capital Issues in the Ministry of Finance. With

the constitution of SEBI, the Capital Issues (Control) Act, 1947 was repealed and the office of the Controller of

Capital Issues was abolished. Cf. A. Ramaiya, Guide to Companies Act, Vol.1, 17th

ed., (Lexis Nexis Butterworths

Wadhwa Nagpur: Haryana, 2010), pp. 726 727.


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1.3.1 The Companies Act is the primary law governing all companies in India and lays downinter alia the basic rules for issue and transfer of securities by companies and issue of

dividends by companies. The Central Government (acting through the Registrars of

Companies and Regional Director, in most cases) is the main regulating authority underthe Companies Act;

1.3.2 The SCRA regulates dealings in securities and lays down the framework for setting upstock exchanges in India. An important objective of SCRA is to prevent undesirable

transactions in securities. The Central Government is the main regulatory authority

under SCRA.

1.3.3 As noted above, the SEBI Act created SEBI to protect investors and regulate thesecurities market. Pursuant to the SEBI Act, SEBI has promulgated rules governing

disclosure requirements for issue of securities, insider trading, takeover, market

functionaries (brokers, portfolio managers, foreign institutional investors, merchantbankers) etc.

1.3.4 The Depositories Act lays down the framework for dematerialisation of securities so thatthese may be traded in electronic form.

1.4 Under the Companies Act3, a company may be private or public. A private company, by its verynature and definition, is restricted from offering shares to the public and having more than 50

shareholders. A private company is also required to restrict the transferability of its shares. A

public company, on the other hand, can offer its shares to the public without any restriction on

the number of its shareholders. Also, the shares of a public company are required to be freely

transferable. A public company is more stringently regulated than a private company, since

public shareholders could potentially be involved. A public company which offers shares to the

public must list on a recognized stock exchange. Consequently, public companies may be listed

or unlisted depending on whether their shares have been offered to the public or not.

Scope of this Article

1.5 An important issue related to the regulation of companies is the scope of SEBIs jurisdiction overcompanies. This issue is significant to determine the regulatory framework that applies to a

particular company. A two judge bench of the Supreme Court examined this issue at length in

Sahara India Real Estate Corporation Ltd. and Ors. v. Securities and Exchange Board of India and

Anr.4 (Sahara Case) This article analyses this case by (i) summarising the important provisions

of the relevant securities laws noted above; (ii) outlining the salient features of the judgment;and (iii) examining the implications of the judgment.

3See Section 3 of the Companies Act for the definition of a private company and a public company.

4MANU/SC/0702/2012; (2012) 8 SCALE 101.


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2. Important Provisions of Relevant Securities LawsDefinition of securities

2.1 SCRA provides the base definition of securities. Section 2(h) of SCRA defines securities toinclude (i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable

securities of a like nature in or of any incorporated company or other body corporate; (ii)

derivatives; (iii) instruments of a collective investment scheme; (iv) security receipts under

securitization law; (v) mutual fund scheme units; (vi) Government securities; (vii) other

instruments declared by the Central Government as securities; and (vii) rights or interests in

securities. This definition of securities has been adopted by the SEBI Act5. The Companies Act

also adopts this definition of securities but in 20006 this definition was amended and hybrids

were expressly included. Hybrids are defined in the Companies Act as any security which has

the character of more than one type of security, including their derivatives7.

Section 55A of the Companies Act

2.2 Section 55A of the Companies Act, which was introduced in 20008, defines the powers of SEBIunder the Companies Act and provides that the provisions contained in sections 55 to 58, 59 to

819 (including sections 68A, 77A and 80A), 108, 109, 110, 11210, 11311, 11612, 117, 118, 119, 120,

121, 12213, 206, 206A and 20714 so far as they relate to issue and transfer of securities and non-

payment of dividend shall (a) in case of listed public companies15; (b) in case of those public

companies which intend to get their securities listed on any recognized stock exchange in India,

be administered by SEBI; and (c) in any other case, be administered by the Central Government.

The Explanation to Section 55A provides that for the removal of doubts, it is hereby declared

that all powers relating to all other matters including the matters relating to prospectus,

statement in lieu of prospectus, return of allotment, issue of shares and redemption of

irredeemable preference shares shall be exercised by the Central Government, Company Law

Board or the Registrar of Companies, as the case may be.

Issue of securities under the Companies Act

2.3 Under the Companies Act, a public company can issue securities by way of a public offer, rightsissue or private placement.

5Section 2(i) of the SEBI Act.

6This amendment was made by the Companies (Amendment) Act, 2000 w.e.f. 13 December 2000.

7 Section 2(19A) of the Companies Act.8

This amendment was made by the Companies (Amendment) Act, 2000 w.e.f. 13 December 2000.9

Sections 55 to 58 and 59 to 81 of the Companies Act deals with the prospectus and matters related to the issue

and allotment of shares and debentures.10

Sections 108, 109, 110 and 112 of the Companies Act deals with transfer of shares.11

Section 113 of the Companies Act deals with the time limit for issue of certificates on an issue or transfer of

shares or debentures.12

Section 116 of the Companies Act lays down the penalty for impersonation of a shareholder.13

Sections 117, 118, 119, 120 and 121 of the Companies Act are special provisions in relation to debentures.14

Sections 206, 206A and 207 of the Companies Act deal with the manner and time of payment of dividends.15

Section 2(23A) of the Companies Act defines listed public companies as a public company which has any of its

securities listed in any recognized stock exchange.


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2.3.1 A rights issue is an offer of shares to existing shareholders of the company16.2.3.2 Section 67 of the Companies Act defines a public offer of shares or debentures. A public

offer or invitation includes an offer or invitation to a section of the public. Section 67(3)

further provides that no offer or invitation shall be treated as made to the public if the

offer or invitation can properly be regarded, in all circumstances (a) as not being

calculated to result, directly or indirectly, in the shares or debentures becoming

available for subscription or purchase by persons other than those receiving the offer or

invitation; or (b) otherwise as being a domestic concern of the persons making and

receiving the offer or invitation: Providedthat nothing contained in this sub-section shall

apply in a case where the offer or invitation to subscribe for shares or debentures is

made to fifty persons or more.

2.3.3 A private placement is not defined in the Companies Act but is generally understood asan issue of securities that does not amount to a rights issue or a public offer.Preferential Allotment

2.4 A public offer and a private placement could involve the issue of shares to persons who are notexisting shareholders of the company. Under Section 81(1A) of the Companies Act any issue of

shares to persons who are not existing shareholders of the company can only be done if a

special resolution is passed by the company in general meeting17. Further, the Unlisted Public

Companies (Preferential Allotment) Rules, 2003 (Preferential Allotment Rules) govern such

issues by unlisted public companies if the issue falls within the definition of preferential

allotment. Prior to 2011, the Preferential Allotment Rules defined a preferential allotment to

include issue of shares on preferential basis and / or through private placement made by a

company pursuant to a special resolution passed under Section 81(1A) of the Companies Act

and issue of shares to promoters and their relatives either in public issue or otherwise. In

201118, the Preferential Allotment Rules were amended and a new definition of preferential

allotment was inserted which provided that preferential allotment means allotment of shares

or any other instrument convertible into shares including hybrid instruments convertible into

shares on a preferential basis pursuant to Section 81(1A) of the Companies Act: Providedthat

the name, fathers name, address and occupation of persons to whom such allotment is

proposed to be made shall be mentioned in the resolution passed by the members under that

sub-section: Providedfurther that persons to whom such offer is proposed, shall not be more

than forty-nine as per the first proviso of Section 67(3) of the Companies Act. A new Rule 8 was

also introduced by the 2011 amendment, sub-rule (2) of which provided that any offer orinvitation not in compliance with Section 81(1A) of the Companies Act read with Section 67(3) of

the Companies Act will be treated as a public offer and the provisions of SCRA and the SEBI Act

must be complied with. Thus, post the 2011 amendment it became clear that the Preferential

16Section 81(1) of the Companies Act lays down the conditions for a rights issue.

17Please note that Section 81 of the Companies Act applies at the earlier of (i) two years from the formation of the

company; or (ii) at any time after the expiry of one year from the allotment of shares in the company made for the

first time after its formation.18

The amendments took effect on 14 December 2011.


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Allotment Rules would not apply to a public offer, which would need to comply with the

requirements of SCRA and the SEBI regulations promulgated pursuant to the SEBI Act.

Prospectus

2.5 A prospectus is defined in the Companies Act to mean any document described or issued as aprospectus and includes any notice, circular, advertisement or other document inviting deposits

from the public or inviting offers from the public for the subscription or purchase of any shares

in, or debentures of, a body corporate19. Under Section 56 of the Companies Act a prospectus

issued by or on behalf of a company must contain various particulars specified in Schedule II

of the Companies Act. Issued generally is defined to mean in relation to a prospectus, issued

to persons irrespective of their being existing members or debenture holders of the body

corporate to which the prospectus relates. Further, Section 56 of the Companies Act does not

apply to (a) the issue to existing members or debenture holders of a company of a prospectus or

form of application relating to shares or debentures of the company, whether such personshave a right to renounce or not; or (b) the issue of a prospectus or form of application relating

to shares or debentures which are in all respects uniform with shares or debentures previously

issued and dealt with on a recognized stock exchange. From these provisions, it appears clear

that a public offer of shares or debentures requires the issue of a prospectus which fulfills the

requirements of Section 56 of the Companies Act unless such offer falls within the specifically

excluded categories. A prospectus must be dated and such date, unless the contrary is proved, is

taken as the date of publication20. On or before the date of publication of a prospectus it must

be registered with the Registrar21. The penalties for mis-statement in a prospectus are dealt

with by Sections 62 and 63 of the Companies Act while the penalty for fraudulently inducing

persons to invest in a company is contained in Section 68 of the Companies Act.

IM and RHP under Section 60B of the Companies Act

2.6 Section 60B (1) of the Companies Act22 provides that a public company making an issue ofsecurities may circulate an information memorandum to the public prior to filing of a

prospectus. An information memorandum is defined as a process undertaken prior to the

filing of a prospectus by which a demand for the securities proposed to be issued by a company

is elicited, and the price and the terms of issue for such securities is assessed by means of a

notice, circular, advertisement or document23. Further, the company inviting subscription by an

information memorandum must file a red-herring prospectus24 at least three days before the

opening of the offer. A red-herring prospectus does not have complete particulars on the price

of securities offered and the quantum of securities offered25. The information memorandum

and red-herring prospectus carry the same obligations as are applicable to a prospectus. Uponclosing of the offer of securities, a final prospectus stating the total capital raised and the closing

19Section 2(36) of the Companies Act.

20Section 55 of the Companies Act.

21Section 60 of the Companies Act.

22This provision was inserted by the Companies (Amendment) Act, 2000 w.e.f. 13 December 2000.

23Section 2(19B) of the Companies Act.

24The section is not clear on who the red herring prospectus must be filed with. In A Ramaiya, op. cit., p. 958 the

author states that a red-herring prospectus must be filed with SEBI for a listed public company and with the

Registrar for an unlisted public company.25

Explanation to sub-sections (2), (3) and (4) of Section 60B of the Companies Act.


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price of securities and any other incomplete details in the red-herring prospectus must be filed

with SEBI and the Registrar for a listed public company and the Registrar for an unlisted public

company26. The Preferential Allotment Rules as amended also provides that a fresh issue or

offer cannot be made unless the final prospectus has been filed in terms of Section 60B(9) of theCompanies Act for an earlier offer or invitation.

Mandatory listing requirement under Section 73 of the Companies Act

2.7 Under Section 73 of the Companies Act every company intending to offer shares or debenturesto the public for subscription by the issue of a prospectus must, before such issue, make an

application for listing of such shares or debentures to one or more recognized stock

exchanges27. The company has ten weeks from the closure of the subscription lists to get

permission from the stock exchanges28. Failure to dispose the application within this period is

deemed a refusal of permission29. Where such an application has not been made or permission

has been refused by the stock exchanges, the company is required to forthwith refund moneyreceived from applicants within eight days of the relevant date failing which the company and

every officer in default is liable to refund the money with 15% interest for the period of delay30.

SCRA

2.8 Based on the interpretation of marketable securities of a like nature in the definition ofsecurities in Section 2(h)(i) of the SCRA, it has been held that SCRA would only apply to public

companies, whether listed or not, and not to private companies31. The provisions of SCRA

regulate the formation and operation of recognized stock exchanges, which power is

concurrently held by the Central Government and SEBI, listing of securities, dealings in securities

including what constitutes a valid contract in securities and measures to prevent undesirable

speculation in securities, and penalties for violation of SCRA. Section 28(1)(b) of SCRA provides

that the SCRA would not apply to any convertible bond or share warrant or any option or right in

relation thereto, to receive shares from the issuer company or its shareholders, whether by

conversion of the bond or warrant or otherwise, on the basis of a price agreed at the time of

issue of the bond or warrant.

SEBI Act

2.9 Under the SEBI Act, SEBI is entrusted with the duty to protect the interests of investors and topromote and regulate the development of the securities market by such measures as it deems

fit including, without limitation (a) regulating the business in stock exchanges and any other

securities market; (b) registering and regulating the working of stock brokers, sub-brokers, sharetransfer agents, bankers to an issue, trustees, registrars, merchant bankers, underwriters,

investment managers and other market intermediaries; (c) registering and regulating various

26Section 60B(9) of the Companies Act.




30Section 73(2) of the Companies Act read with Rule 4D of the Companies (Central Governments) General Rules

and Forms, 1956.31

Norman J Hamilton v. Umedbhai S Patel, MANU/MH/0066/1979; [1979] 49 CompCas 1(Bom).


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other entities like foreign institutional investors, credit rating agencies, etc. (d) registering and

regulating venture capital funds and mutual funds; (e) prohibiting fraudulent and unfair trade

practices relating to the securities market; (f) prohibiting insider trading; (g) regulating

takeovers, etc. In discharge of its functions, SEBI is given wide powers of enforcement includingsuspending trading of any security on an exchange, restraining persons from accessing the

securities market, etc32. Under Section 11A of the SEBI Act, SEBI may (i) without prejudice to the

Companies Act specify, by regulations, matters related to the issue of capital, transfer of

securities, disclosure requirements, issue and content of prospectus and matters incidental

thereto; and (ii) without prejudice to SCRA, specify the requirements for listing and transfer of

securities. SEBI also has power to issue directions in the discharge of its functions33 and

investigate the affairs of persons associated with the securities market34. Section 12A of SCRA

specifies the general prohibition on manipulative and deceptive devices, insider trading and

takeovers in compliance with the SEBI Act and rules and regulations passed there under.

Chapter VIA of the SEBI Act lays down the adjudication process to be followed by SEBI for non-

compliance with the SEBI Act and the penalties that may be imposed. Appeal from the decisionsof SEBI under the SEBI Act lies to the Securities Appellate Tribunal (SAT) constituted under the

SEBI Act35 with a final appeal to the Supreme Court from the decisions of SAT36.

SEBI Regulations

2.10 Pursuant to the SEBI Act, SEBI has passed the following regulations among others:2.10.1 SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (SEBI (ICDR)

Regulations). These regulations lay down the issue and disclosure requirements for

public issues, rights issues, preferential issues, bonus issues, qualified institutions

placement (all by a listed issuer) and the issue of Indian Depository Receipts. Before the

SEBI (ICDR) Regulations, SEBI (Disclosure and Investor Protection) Guidelines, 2000 (DIP

Guidelines) applied;

2.10.2 SEBI (Issue and Listing of Debt Securities) Regulations, 2008 on the public issue of debtsecurities and the listing of debt securities on a recognized stock exchange;

2.10.3 SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to the SecuritiesMarket) Regulations, 2003.

2.10.4 SEBI (Prohibition of Insider Trading) Regulations, 1992;2.10.5 SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011;2.10.6 SEBI (Investor Protection and Education Fund) Regulations, 2009;

32Section 11 of the SEBI Act.

33Section11B of the SEBI Act.

34Section 11C of the SEBI Act.

35Chapter VIB of the SEBI Act.

36Section 15Z of the SEBI Act.


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2.10.7 Various regulations on registration and regulation of market functionaries like financialinstitutional investors, brokers, sub-brokers, merchant bankers, registrars to the issue,

etc.

2.11 Based on the above provisions, the critical issue that came up before the Supreme Court wasthe scope of SEBIs jurisdiction and the consequent compliance requirements for issue of shares

by a public company.

3. The Sahara CaseFacts

3.1 In Sahara India Real Estate Corporation Ltd. and Ors. v. Securities and Exchange Board of Indiaand Anr.37, two unlisted public companies of the Sahara Group, Sahara India Real Estate

Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL)had issued and allotted unsecured Optionally Fully Convertible Debentures (OFCDs) to

approximately 3 crore investors and collected an amount of approximately Rs. 24,000 crores

from such investors.

3.1.1 On 3 March 2008, the shareholders of SIRECL passed a special resolution pursuant toSection 81(1A) of the Companies Act for the issue of OFCDs on a private placement basis

to friends, associates, group companies, workers / employees and other individuals

connected with the Sahara Group on such terms as may be decided by the Board of

Directors of SIRECL. A similar resolution was passed by the shareholders of SHICL on 16

September 2009.

3.1.2 On 13 March 2008, SIRECL filed a red-herring prospectus (RHP) with the Registrar ofCompanies, Kanpur, Uttar Pradesh pursuant to Section 60B of the Companies Act for the

issue of OFCDs on a private placement basis. The RHP stated that SIRECL did not intend

to list the OFCDs on a recognized stock exchange and only the persons to whom the

Information Memorandum was circulated could apply. The RHP was registered on 18

March 2008. Similarly, SHICL filed an RHP with the Registrar of Companies, Mumbai,

Maharashtra on 6 October 2009, which was registered on 15 October 2009.

3.1.3 After registration of the RHPs, SIRECL and SHICL issued information memoranda (IMs)along with application forms for private placement of OFCDs to various investors. The

IMs carried a recital that they were private and confidential and not for circulation. The

IMs also stated that the companies did not intend to get the OFCDs listed since the issuewas a private placement and the offer should not be construed as a public offer. The

issue of OFCDs by SIRECL commenced on 25 April 2008 and that of SHICL commenced

on 20 November 2009.

On 12 January 2010, while processing the RHP submitted by Sahara Prime City Limited,

another company of the Sahara Group, for an initial public offer, SEBI discovered the

issue of OFCDs by SIRECL and SHICL. A private complaint was also received in this regard

by SEBI alleging the violation of various statutory requirements by SIRECL and SHICL.

37MANU/SC/0702/2012; (2012) 8 SCALE 101.


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SEBI then addressed letters to Ministry of Corporate Affairs (MCA) enclosing the

complaint. SEBI also sought various details from the Sahara Group on the issue of OFCDs

by its letter dated 12 May 2010. The Sahara Group consistently disputed the jurisdiction

of SEBI under Section 55A of the Companies Act over the issue of OFCDs andcorrespondence was exchanged between the MCA, SEBI and the Sahara Group in this

regard. The Sahara Group also stated that it would comply with the requirement to file a

final prospectus under Section 60B(9) of the Companies Act to signify closure of the

issue of OFCDs. After further requests for information by SEBI, the Sahara Group

appears to have sent an encrypted CD to SEBI with details of the investors, which SEBI

could not access. After the issue of notice by SEBI on 20 May 2011 and a detailed reply

by the Sahara Group on 30 May 2011, the whole time member of SEBI passed its final

order against SIRECL and SHICL on 23 June 2011 holding that the issue of OFCDs by

these companies was a public issue under Section 67(3) of the Companies Act and not a

private placement as contended and consequently various provisions of the Companies

Act (including Sections 56 and 73) and the SEBI (ICDR) Regulations dealing with publicissue of securities had not been complied with by the companies. SIRECL and SHICL were

ordered to refund the money collected from the issue of OFCDs to the investors with

interest. The appeal of SIRECL and SHICL to SAT was dismissed on 18 October 2011.

Thereafter, SIRECL and SHICL filed appeals before the Supreme Court.

Issues

3.2 On the above facts, the Supreme Court was called upon to decide whether (i) the issue of OFCDsby SIRECL and SHICL was a public issue under the Companies Act; (ii) in light of issue (i), SEBI had

jurisdiction over the issue of such OFCDs; (iii) SEBIs order against SIRECL and SHICL to refund

the money with interest to the investors was valid. Both Justice K.S. Panicker Radhakrishnan and

Justice Jagdish Khehar decided in favour of SEBI in separately reasoned judgments and

dismissed the appeal of SIRECL and SHICL.

Judgment and Reasoning

3.3 The decision and reasoning can be summarized as follows:3.3.1 The issue of OFCDs by SIRECL and SHICL was a public offer pursuant to the proviso to

Section 67(3) of the Companies Act since the offer was made to more than forty nine

persons.

(a) Section 67(3) of the Companies Act is an exception to Sections 67(1) and 67(2)of the Companies Act. As a result of the proviso to Section 67(3) of the

Companies Act, if an offer of shares or debentures is made to fifty or more

persons, it would be deemed to be a public issue even if the requirements of

Section 67(3)(a) or Section 67(3)(b) of the Companies Act are met. Justice

Khehar also relied on Section 114 of the Indian Evidence Act to raise the

presumption that the issue of OFCDs was an offer to the public since SIRECL and

SHICL had willfully avoided furnishing information requested by SEBI on the

issue of OFCDs. The presumption, therefore, was that if these companies had

furnished the information to SEBI it would be detrimental to them. He also

concluded that even without the application of the proviso to Section 67(3) of


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the Companies Act, the issue of OFCDs did not meet the requirements of

Section 67(3)(a) and Section 67(3)(b) since there was nothing to show that it

was a domestic concern of the investors and the OFCDs were transferable;

(b) OFCDs were hybrid securities. The argument that since Section 67 used thephrase shares or debentures it would not apply to hybrid securities like OFCDs

was not valid. No doubt, the Companies Act included hybrids in the definition of

securities unlike the SEBI Act and SCRA. However, OFCDs are debentures which

could become shares in future. The definition of debenture in Section 2(12) of

the Companies Act includes debenture stock, bonds and any other securities of

a company. The definition of securities in the Companies Act is derived from

SCRA. Since the definition of securities in SCRA is inclusive and wide, OFCDs

would be included and hence, would be debentures for the purposes of the

Companies Act. This is also borne out by the fact that SIRECL and SHICL treated

OFCDs as debentures in the IM, RHP, application forms and balance sheet.

(c) The argument that prior to the 2011 Amendment of the Preferential AllotmentRules, which introduced the proviso restricting the number of investors to forty

nine in the definition of preferential allotment, the Preferential Allotment

Rules permitted a private placement of securities by unlisted public companies

pursuant to Section 81(1A) of the Companies Act without the restriction on the

number of investors contained in Section 67(3) of the Companies Act was

devoid of merit. Section 81(1A) of the Companies Act does not override the

provisions relating to public issue in the Companies Act. The Preferential

Allotment Rules do not apply to a public issue as described in Section 67(3) of

the Act. These Rules as subordinate legislation cannot supersede the express

provisions of the Companies Act. The 2011 Amendment only made what was

implicit in the Preferential Allotment Rules explicit.

3.3.2 Since the issue of OFCDs by SIRECL and SHICL was a public offer, SEBI had jurisdictionover such an issue of OFCDs under Section 55A of the Companies Act.

(a) OFCDs as hybrid securities fell within the purview of Section 55A of theCompanies Act as also the SCRA and the SEBI Act. Therefore, SEBIs jurisdiction

could not be questioned on this ground.

(b) Since Sections 56, 62, 63 and 73 of the Companies Act relate to issue ofsecurities, SEBI had power of administration under these provisions pursuant toSection 55A of the Companies Act and separate regulations under Section

642(4) of the Companies Act were not required;

(c) The argument that Section 60B was outside the scope of Section 55A of theCompanies Act thereby excluding SEBIs jurisdiction over an issue pursuant to

Section 60B was invalid. Even though Section 60B of the Companies Act was not

included in the bracketed portion after the reference to Section 81 in Section

55A of the Companies Act, Section 60B fell within SEBIs jurisdiction since

Section 55A applied to Sections 59 to 81 implying all provisions in between

irrespective of the bracketed portion. When certain provisions like Section 108A


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to 108I of the Companies Act were intended to be excluded from Section 55A

reference was made to Section 108 and Section 109 separately and not to

Sections 108 to 109. Consequently, SIRECL and SHICL should have filed the

final prospectus with SEBI under Section 60B(9) of the Companies Act. Failure todo so would give rise to criminal consequences.

3.3.3 The issue of OFCDs must comply with the listing requirements in Section 73 of theCompanies Act and Section 56 read with the SEBI (ICDR) Regulations.

(a) Under Section 73(1) of the Companies Act, a company intending to offer sharesor debentures to the public must apply to a recognized stock exchange for

listing before the issue. Companies inviting subscription from over forty nine

persons have no option or choice but to list their securities. After 2000, every

private placement to fifty persons or more would be treated as an issue to the

public. Therefore, SIRECL and SHICL were legally obliged to list the OFCDs fromthe moment the prospectus was issued. Merely because the process under

Section 60B of the Companies Act was followed would not lead to an inference

that Section 73(1) of the Companies Act need not be complied with. The

companies cannot argue their lack of intention from statements made in the

prospectus since their conduct clearly showed an intention to offer the OFCDs

to the public. On the same lines as noted above, the Preferential Allotment

Rules cannot override the requirements of Section 73(1);

(b) Pursuant to Section 56 of the Companies Act and the SEBI (ICDR) Regulations,the RHP for the OFCDs issued by SIRECL and SHICL should have contained a

statutory declaration in terms to Part I of Schedule II of the Companies Act,

which was absent. SIRECL and SHICL have also violated the disclosure

requirements and investor protection requirements contained in the SEBI (ICDR)

Regulations and its predecessor, the DIP Guidelines.

(c) The argument that the listing requirements would not apply to the OFCDsissued by SIRECL and SHICL since Section 28(1)(b) of SCRA excluded convertible

bonds from the purview of SCRA thereby precluding any listing requirement for

convertible bonds or debentures was without basis. Section 28(1)(b) did not

exclude application of SCRA to convertible bonds but to the option attached to

such bonds to receive shares. This provision became necessary since Section 20

of SCRA dealing with options was deleted in 1995.

3.3.4 There appears to be a pre-planned attempt on the part of SIRECL and SHICL to bypassthe regulatory and administrative authority of SEBI. SEBI had adequate powers under

Section 11A and 11B of the SEBI Act as well as Regulation 107 of the SEBI (ICDR)

Regulations to order refund of the money with interest by SIRECL and SHICL to the

investors in OFCDs.

4. Implications of the Sahara Case4.1 The judgment in the Sahara case is clear and unequivocal. The approach of the Supreme Court

was pragmatic and unswayed by technical distinctions and arguments related to the nature of


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securities and the scope of public issues. The scope of SEBIs jurisdiction over an issue of shares

by an unlisted public company has thus been clarified.

Propositions

4.2 From the judgment in the Sahara case the following important propositions can be postulated:4.2.1 A private placement of securities pursuant to a preferential allotment under Section

81(1A) of the Companies Act, would only be outside the jurisdiction of SEBI if it is made

to less than fifty persons and meets the requirements of Section 67(3)(a) or Section

67(3)(b) of the Companies Act. If it does, the Preferential Allotment Rules would apply;

4.2.2 If a public company issues shares or debentures to fifty persons or more the offerwould be a public offer pursuant to the proviso to Section 67(3) of the Companies Act.

The term shares or debentures in this context would include any hybrid (having thefeatures of both shares and debentures) as defined by Section 2(19A) of the Companies

Act. In such a case, the public company must apply for listing to a recognized stock

exchange under Section 73(1) of the Companies Act prior to the issue of shares or

debentures. Further, any prospectus issued by the company must meet the

requirements of Section 56 of the Companies Act. These requirements would not be

affected if the company follows the process under Section 60B of the Companies Act

and terms the offer a private placement in the offering documents like the IM and the

RHP.

4.2.3 SEBI would have jurisdiction over all public companies that make a public offer of sharesor debentures under Section 55A of the Companies Act since such companies are

required to list such shares or debentures under Section 73(1) of the Companies Act.

The extent of SEBIs jurisdiction would be to the issue and transfer of securities and the

non-payment of dividend by such companies. Therefore, public companies who make a

public offer of shares or debentures must comply with the requirements of the SEBI

(ICDR) Regulations and any other applicable SEBI regulation.

4.2.4 If a company fails to meet the requirements of the Companies Act and the SEBIregulations as outlined above, SEBI can order refund of the money collected by the

company to its investors with interest and impose sanctions in accordance with the

provisions of the SEBI Act. The company could also be liable for civil and criminal

sanctions under the Companies Act.

4.2.5 A negative presumption can be raised against a company that fails to furnishinformation within its control to a regulatory authority when asked to do so.

Intention to List: Need for Objective Criteria

4.3 While the Sahara case is a positive development, one issue remains on which further judicial

clarity would be welcome. Section 55A of the Companies Act gives SEBI jurisdiction over

companies that intend to list in relation to the matters stated therein. Given the facts of the

case, the judges in the Sahara case did not need to look into the parameters that would

determine whether a company intends to list or not. Intention unsupported by action is always


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difficult to ascertain. In Kalpana Bhandari and Ors. v. Securities and Exchange Board of India and

Ors.38, a division bench of the Bombay High Court considered a writ petition against SEBI. The

petitioners were shareholders of Sesa Goa Limited (Sesa Goa), a listed entity. Sesa Industries

Limited (Sesa Industries) was a subsidiary of Sesa Goa. The petitioners sought relief from SEBIfor fraudulent representations made by Sesa Industries in relation to a preferential allotment of

shares made by Sesa Industries to the petitioners. Counsel for the petitioners argued that based

on various speeches by the Chairman of Sesa Industries and its Annual Reports, Sesa Industries

intended to list its securities and was, therefore, within SEBIs jurisdiction under Section 55A of

the Companies Act. SEBI resisted the petition on the ground that Sesa Industries had not made

an application to list its securities under the SCRA and rules framed thereunder and hence its

intention to list was not manifest. Justice Lodha speaking for the Bench upheld SEBIs contention

and observed: The approach of SEBI cannot be faulted. Even the learned Counsel for the

petitioners did not dispute the criteria applied by SEBI is not relevant. However, the learned

Counsel for the petitioners submitted that every year the Chairman in his speech in the annual

general meeting, expressed companys intention to have their shares listed at the recognizedstock exchanges. The intention is always a question of fact and unless the opinion of regulatory

body on this aspect is palpably perverse and grossly erroneous, it would not be proper for the

Court in extraordinary jurisdiction to interfere with such opinion of regulatory body. Moreover

not a single resolution of the Board of Directors has been placed on record by the petitioners to

indicate that the Board of Sesa Industries took decision to have their securities listed at the

recognized stock exchanges. Besides that the yardstick applied by SEBI that by making an

application to recognized stock exchange, the intention of the company to have its securities

listed at recognized stock exchange is manifested cannot be said to be unreasonable. In the

circumstances SEBIs stand that it has no jurisdiction in the matter cannot be said to be without

basis. (emphasis supplied) The Court further observed that SEBIs lack of jurisdiction would not

leave the petitioners remediless since the petitioners could approach the Central Government

to investigate the affairs of Sesa Industries pursuant to Section 55A of the Companies Act read

with Section 237 of the Companies Act. The approach of the Bombay High Court in this case

seems fair. However, the judgment does not definitively identify the criteria that would help

determine whether a company intends to list or not. The standard of proof to prove a

companys intention to list should be reasonable and not overly restrictive since SEBI is the

regulatory body responsible for investor protection and is supposed to be specially qualified for

this purpose. Granted that mere management assurances may not be sufficient evidence of a

companys intention to list but a formal decision by the Board of Directors of the company or its

shareholders should suffice. This would be a more reasonable standard when compared to the

requirement of an application under SCRA as contended by SEBI. Further, the judgment does

suggest that a Board resolution to list could indicate an intention to list. It is hoped that the view

of the Bombay High Court in this case is not the final word on the matter since the decision onlyexamined whether SEBIs approach was reasonable. A more definitive judgment with objective

criteria to determine a companys intention to list will go a long way in clearing up any confusion

on the scope of SEBIs jurisdiction under the Companies Act.

38MANU/MH/1065/2003; [2005] 125 CompCas 804(Bom).


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